Top Strategies for Building a Profitable Managed Services Business

By Julie Ritzer Ross — November 14, 2013

In recent years, industry experts have been urging VARs to position their organizations for growth by adding new solutions to their technology toolboxes or expanding into new vertical segments. However, a more critical move to consider is a migration from an exclusively break-fix model to one in which channel players function not only as traditional solution providers, but also as managed services providers (MSPs).

Statistics play up the importance of following such a path. Todd Thibodeaux, president and CEO of CompTIA, an IT industry association (www.comptia.org), notes that by many estimates, revenues generated by hardware and software sales, implementation and repair alone will decrease at a rate of five percent annually over the next decade. Given plummeting hardware margins, longer replacement cycles and a decreased need for multiple printing devices, higher-end PCs and servers, Thibodeaux asserts, “in 10 years, a VAR’s business could be half of what it is today, or less, if there hasn’t been at least a partial shift over to the MSP side.”

Those VARs that turn up their noses at the MSP model may also find themselves losing business to competitors. Fellow resellers are a force to be reckoned with: Some 50 percent of channel players surveyed for CompTIA’s 2012 Trends in Managed Services Operations study said they offer managed services either exclusively or as a component of their business portfolio, up from 40 percent of companies that participated in last year’s study. Seventeen percent of firms queried expect their managed services arm to generate 75 percent or more of their total revenue over the next five years, and nearly two-thirds of respondents that have not introduced managed services reported plans to do so by year-end.

Big-box electronics retailers, among them CompUSA and Staples, along with “fix-it chains” like Geek Squad, pose a threat, too, observes Joe Persky, director of IT at Boca Raton, FL-based MSP edgeMED Healthcare Solutions (www.edgeMED.com). “Computers are becoming like appliances—when they break, it’s cheaper to buy a new one than to fix the old one, and it’s an easier and more viable proposition to do that off the shelf than to go back to the VAR,” Persky states. “And if (customers) choose repair, they look at a Geek Squad-type operation as the cheaper option.”

Just as significantly, although clients may not immediately embrace managed services and in fact may initially reject them, embracing the MSP model gives VARs a way to meet one increasingly prevalent demand among technology end-users. “The landscape is changing in such a way that the channel is being asked, quite forcefully, to do more with less,” observes Jamie Brenzel, CEO, KineticD (www.kineticd.com).
 
Moreover, the financial and practical benefits to be reaped from managed services cannot be underestimated. At eGuard Technology Services (www.eguardtech.com), an MSP headquartered in Washington, D.C., break-fix work currently accounts for just five percent of all business, down from 95 percent two to four years ago, states Khaled Farhang, founder and CEO. “Working this way gives us a steady stream of recurring revenues and affords us a balanced cash flow, whereas with more break-fix, it could be feast one month and famine, another,” Farhang explains. “And with managed services as opposed to break-fix, there are far fewer worries about emergency calls and being in a closet somewhere at 2 a.m. fixing a problem.”

A CAREFUL APPROACH
While embracing the MSP model clearly makes sense on several levels, a guarded approach to the change is VARs’ best bet. Seasoned MSPs and other experts advocate starting slowly; for example, edgeMED began with managed services around anti-virus, subsequently introducing content filtering services before going farther.

“From our observations and a look at our partners, a hybrid model, where the organization slowly introduces some measure of managed services into their portfolio, while continuing to foster their legacy streams of revenue, works best,” Thibodeaux says. “And many, if not most” channel players find it most practical to keep selling hardware and other infrastructure to their customers, handle the implementation and only then take over management of the devices under terms of an MSP contract.”

Resellers also need to carefully consider which services should be part of their portfolio. Viable options include:

Network security. Persky puts network security at the top of the list of managed services worth offering because they are relatively easy to sell to end-users. “Customers understand and acknowledge that they need security, and it isn’t that big a deal for them that the VAR is delivering it in a different way,” he asserts.

Former VAR Luke Walling, senior vice president, sales and operations, AVG Technologies USA (www.avg.com), agrees, adding that promoting managed network security services can prove less problematic for sales staff than touting more complex services. “It’s a natural segue into the more proactive stance of the MSP model,” Walling explains.

Backup and disaster recovery (BDR). Like network security, BDR is an attractive managed service option for VARs in light of high levels of end-user acceptance. But as Farhang has discovered, BDR has enough positive factors that it is included in all eGuard IT support plans. “When customers have backup on the front end—as they now do with all of our IT service plans—techs spend far fewer hours on recovery,” Farhang explains. “This leads to enhanced productivity.”

E-mail services, including security and backup.

Monitoring, including network monitoring and the tracking of employee compliance with Internet usage policies. Cloud-based services, ranging from cloud-based backup to hosted collaboration, endpoint security, servers and desktops. “Hosted collaboration is gathering steam as well,” observes Jason Bystrak, director, cloud services, Ingram Micro (www.ingrammicro.com).

Both edgeMED and Denver-based IT solutions provider Platte River Networks (www.platteriver.com), have, after ramping up, successfully bundled together different managed services, increasing customer stickiness and bolstering revenues. Under the umbrella of its Information Technology Solutions Group, edgeMED sells four bundles—proactive maintenance, security, backup and recovery and services and parts. Bundle components vary by level, with three versions of each bundle available.

The proactive maintenance package encompasses equipment monitoring, alerts and logging (with remediation); desktop server and peripheral alerts and response; asset inventory management and reporting and executive performance analysis and reports. Patch management for operating systems, applications and network updates; content filtering and cloud-managed anti-virus and anti-spyware protection comprise the security bundle.

The backup and recovery bundle includes managed local backup, online managed data backup, a client backup portal, daily email reports, an online knowledge base, an online ticketing system and customer portal and guaranteed same-day SLA response time. Help desk and on-site service, coupled with product parts, are featured in the services and parts bundle.

Platte River’s Intuition bundle brings together Level Platforms’ infrastructure remote monitoring, Trend Micro endpoint security, McAfee/MxLogic spam filtering and e-mail continuity software; backup and disaster recovery solutions and Awareness Technologies web-filtering software. David DeCamillis, director, business development, says this combination of components allows Platte River to sell Intuition to any SMB with five to 125 users, because companies of this size have identical IT infrastructures no matter the vertical in which they operate.

Additionally, DeCamillis observes, featuring the bundled solution—which is expected to play a key role in an anticipated 19 percent increase in revenues this year—trims time from the sales cycle and enhances the efficiency with which the VAR serves its customers. The former occurs because customers do not engage in the type of bargaining that occurs when each piece of technology is sold as a line item (e.g., attempting to keep parts of their existing solution or buying one component and saying they may add the other later) and the latter, because software patches and revisions can be sent remotely to all end-users.

BEST PRACTICES
Launching managed services means adopting an entirely different set of best practices on the sales side. While some sales personnel will have no trouble switching gears, others will be more reluctant to do so. Many individuals in the latter group will object to swapping what one source calls “large chunks of money up front” for smaller, more regular commission payments. Offering sales staff one year’s worth of commission at the outset of the change can be a very effective “kick-start” incentive for bringing less enthusiastic salespeople to the table, Bystrak suggests.

In many cases, at least a portion of sales team members’ hesitancy to go with the MSP flow stems from not knowing what is truly expected of them in terms of closing deals. According to AVG’s Walling, setting real goals and quotas for each salesperson moves them a few inches off the fence.

So too, can dividing salespeople into two groups based on their particular skills. According to Brenzel, many KineticD partners find it best to assign some sales personnel to serve as “hunters” who search for new managed service account opportunities among existing and prospective clients, while designating others as “farmers” who will nurture relationships on an ongoing basis and sell them new services as appropriate.

Walling, Brenzel and other sources also advocate a methodical, comprehensive approach to training. At edgeMED and eGuard, salespeople get a thorough education that transcends features and pricing structures to include software configurations and the advantages afforded by each service component.

edgeMED sales staff are encouraged to observe goings-on in the MSP’s in-house testing laboratory, where technical personnel create and monitor “dummy” customer companies to test out solutions offered on the service side. They also attend weekly meetings, where everyone must share a managed services sales success story, problem situations and how they were or could have been handled are hashed out as well.

“If salespeople don’t believe in what they’re selling, or they aren’t made to understand and therefore can’t articulate why, they aren’t going to be able to get the deal done,” Farhang says.

He adds that sales staff are also required to hold regular meetings with customers to discuss their business needs and plans. Using the knowledge they have culled, personnel promote services accordingly.

Sales consultant Gil Cargill, founder and CEO, Cargill Consulting Group (www.gilcargill.com), counsels his clients to engage salespeople in role-playing exercises to practice presenting services to prospects. Such discussions must include details of how managed services improve business processes and efficiencies, as well as the ability for SMBs, with the managed services model, to avail themselves of enterprise solutions at an affordable price.

“The pay-one-price advantage is a nice jumping-off point and helps to overcome a lot of objections, but with managed services, salespeople are going to be talking to an entirely different group of decision-makers at an executive level,” Cargill says.

Bystrak concurs. “More than 70 percent of cloud services purchasing decisions are made outside the IT department,” he asserts. “That makes talking process improvements all the more critical.”

While eGuard, edgeMED and Digital River have progressed quite far along the MSP continuum, the majority of players are just dipping their toes in the waters. Still, this is a far smarter approach than sitting on the sand.  As Thibodeaux says, “You’ve got to get wet now, or as hardware becomes even less important than it is today, you’ll drown and regret later.”

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